Assessment item 2
Problem-solving Assignment
Value: 25%
Due date: 05-Sep-2016
Return date: 28-Sep-2016
Submission method options
Alternative submission method
Task
You are required to complete all three questions below. A total of 60 marks are allocated to these questions, which will be converted to a final mark out of 25%.
All workings, when appropriate, must be shown to substantiate your answers.
Question 1 [23 marks]
Consolidation: Principles and accounting requirements; and intra-group transactions
Joan Ltd acquired 100% of the share capital of Jewel Ltd on 1 July 2011, for $356,000. At that date, the share capital and reserves of Jewel Ltd were:
$
Share capital 200,000
Retained earnings 80,000
280,000
At 30 June 2016, five years after acquisition, the following data has been extracted from their financial records:
Joan Ltd Jewel Ltd
$ $
Sales 781,400 740,000
Cost of sales (494,000) (438,000)
Gross profit 287,400 302,000
Dividends received from Jewel Ltd 93,000 -
Management fee revenue 26,500 -
Gain on sale of plant 40,000 36,000
Expenses
Administrative expenses (40,800) (28,700)
Depreciation (29,500) (56,800)
Management fee expense - (26,500)
Other expenses (125,100) (86,000)
Operating profit before tax 251,500 140,000
Income tax expense (75,500) (42,000)
Operating profit after tax 176,000 98,000
Retained earnings 1 July 2015 319,400 239,200
Available for appropriation 495,400 337,200
Dividends paid (137,400) (93,000)
Retained earnings 30 June 2016 358,000 244,200
Equity
Retained earnings 358,000 244,200
Share capital 350,000 200,000
Current liabilities
Accounts payable 81,700 76,300
Tax payable 66,300 25,000
Non-current liabilities
Loans 152,500 120,000
1,008,500 665,500
Current assets
Accounts receivable 55,400 84,500
Inventory 105,000 38,000
Non-current assets
Land and buildings 278,000 326,000
Plant - at cost 299,850 355,800
Less: Accumulated depreciation (85,750) (138,800)
Investment in Jewel Ltd 356,000 -
1,008,500 665,500
Additional information:
(a) The identifiable net assets of Jewel Ltd were recorded at fair value at the date of acquisition, except for inventory that had a fair value which was $2,000 higher than its carrying amount, and an item of plant (cost $25,000 and accumulated depreciation of $15,000) that had a fair value of $19,000. This plant had a remaining useful life of 6 years, with no residual value. All of the inventory was sold by 30 June 2012, but the plant is still owned as at 30 June 2016.
(b) During the year ended 30 June 2016, Joan Ltd made inventory sales to Jewel Ltd of $42,000, while Jewel Ltd made inventory sales to Joan Ltd of $65,000.
(c) The closing inventory (at 30 June 2016) of Joan Ltd includes inventory acquired from Jewel Ltd at a cost of $33,000. This cost Jewel Ltd $20,000 to produce.
(d) The closing inventory (at 30 June 2016) of Jewel Ltd includes inventory acquired from Joan Ltd at a cost of $7,000. This cost Joan Ltd $5,000 to produce.
(e) The opening inventory of Joan Ltd (at 1 July 2015) included inventory acquired from Jewel Ltd for $20,000, that had cost Jewel Ltd $15,000 to produce. This entire inventory was sold by Joan Ltd to parties external to the group during the year ended 30 June 2016.
(f) On 1 July 2015, Jewel Ltd sold an item of plant to Joan Ltd for $116,000 when its carrying amount in Jewel Ltd’s financial statements was $80,000 (cost $135,000 less accumulated depreciation of $55,000). This plant is assessed as having a remaining useful life of 6 years, with no residual value.
(g) During the year ended 30 June 2016, Jewel Ltd paid management fees of $26,500 to Joan Ltd.
(h) The tax rate is 30%.
Required:
A. Prepare an acquisition analysis and the consolidation journal entries the year ending 30 June 2016 for the group comprising Joan Ltd and Jewel Ltd.
B. Prepared a consolidation worksheet for the year ending 30 June 2016.
Marks allocated
Acquisition analysis 3
Consolidation journal entries 15
Consolidation worksheet 5
Total 23
Question 2 [27 marks]
Consolidation: Principles and accounting requirements; intra-group transactions and non-controlling interests
On 1 July 2014, Bosco Ltd purchased 80% of the issued shares of Circus Ltd for $890,000. At the date of acquisition, the equity of Circus Ltd consisted of share capital and retained earnings of $500,000 and $425,000 respectively. At the date of acquisition, all assets of Circus Ltd were recorded at fair value, except for inventory, that had a fair value which was $10,000 higher than its carrying amount. All of this inventory was on-sold to external parties by 30 June 2015.
As at 30 June 2016, the following financial statements have been extracted from the financial records of Bosco Ltd and Circus Ltd:
Bosco Ltd Circus Ltd
$ $
Sales revenue 2,035,000 1,250,000
Cost of goods sold (1,280,000) (595,000)
Gross profit 755,000 655,000
Dividend revenue - from Circus Ltd 186,000 -
Interest revenue 9,000 -
Profit on sale of plant 87,500 -
Expenses
Administrative expenses (86,000) (39,000)
Depreciation (61,250) (30,000)
Interest expense - (9,000)
Other expenses (262,750) (132,500)
Profit before tax 627,500 444,500
Tax expense (182,250) (133,350)
Profit after tax 445,250 311,150
Retained earnings 1 July 2015 798,750 598,350
1,244,000 909,500
Dividends paid (350,000) (232,500)
Retained earnings 30 June 2016 894,000 677,000
Equity
Retained earnings 894,000 677,000
Share capital 1,025,000 500,000
Current liabilities
Accounts payable 142,000 110,000
Tax payable 153,000 113,000
Non-current liabilities
Loan from Bosco Ltd - 300,000
2,214,000 1,700,000
Current assets
Cash 110,000 228,000
Accounts receivable 94,000 275,000
Inventory 120,000 300,000
Non-current assets
Land and buildings 370,000 621,000
Plant - at cost 558,000 620,000
Less: accumulated depreciation (228,000) (344,000)
Loan to Circus Ltd 300,000 -
Investment in Circus Ltd 890,000 -
2,214,000 1,700,000
The following additional information is provided for the year ended 30 June 2016:
(a) Bosco Ltd uses the partial goodwill method when accounting for non-controlling interests.
(b) During the year ended 30 June 2016, Bosco Ltd made inventory sales to Circus Ltd of $143,000, while Circus Ltd made inventory sales to Bosco Ltd of $120,000.
(c) By 30 June 2016, all of the inventory sold by Bosco Ltd to Circus Ltd during the year had been on-sold to external parties.
(d) The closing inventory of Bosco Ltd at 30 June 2016 includes inventory acquired from Circus Ltd at a cost of $84,000. This had cost Circus Ltd $70,000 to produce.
(e) The directors believe that the goodwill acquired was impaired by $5,000 in the current financial year.
(f) On 1 July 2015, Bosco Ltd sold an item of plant to Circus Ltd for $190,000, when its carrying amount in Bosco Ltd’s financial statements was $102,500 (cost $237,500 less accumulated depreciation of $135,000). This plant was assessed as having a remaining useful life of six years, with no residual value.
(g) On 1 January 2016, Bosco Ltd loaned Circus Ltd $300,000. Interest on the loan for the year ended 30 June 2016 amounted to $9,000, and was paid by Circus Ltd on 30 June 2016.
(h) The tax rate is 30%.
Required:
A. With reference to the relevant accounting standards, explain why the relationship between Bosco Ltd and Circus Ltd is a parent-subsidiary relationship and not an associate relationship, even though Bosco Ltd does not own 100% of the shares in Circus Ltd.
B. Prepare the acquisition analysis and consolidation journal entries (including NCI entries) necessary for the preparation of consolidated financial statements for Bosco Ltd and its subsidiary, Circus Ltd, for the financial year ended 30 June 2016.
C. Prepare the acquisition analysis assuming that Bosco Ltd uses the full goodwill method when accounting for non-controlling interests. Assume that the fair value of the non-controlling interest at 1 July 2014 was $200,000.
Marks allocated
A. Explanation of relationship 2
B. Acquisition analysis 2
Consolidation entries (including NCI entries) 21
C. Acquisition analysis (using full goodwill method) 2
Total 27
Question 3 [10 marks]
Accounting for associates
On 1 July 2015, Cricket Ltd acquired 40% of the share capital of Charlie Ltd, for $160,000. The equity of Charlie Ltd on that date was:
Share capital $200,000
Retained earnings $95,000
All of the identifiable net assets of Charlie Ltd were recorded at fair value. The following information is provided for Charlie Ltd for the year ended 30 June 2017:
$
Operating profit before tax 3,620,000
Income tax expense (1,086,000)
Operating profit after tax 2,534,000
Retained earnings at 1 July 2016 257,000
Dividends paid (200,000)
Retained earnings at 30 June 2017 2,591,000
Additional information:
• The closing inventory of Cricket Ltd included goods purchased from Charlie Ltd during the year for $6,000. Their cost to Charlie Ltd was $4,000.
• The closing inventory of Charlie Ltd included goods purchased from Cricket Ltd during the year for $12,000. Their cost to Cricket Ltd was $9,000.
• During the year ended 30 June 2017, Charlie Ltd revalued land upwards $50,000, resulting in asset revaluation surplus of $35,000 being recognised in equity.
• The tax rate is 30%.
Required:
Prepare the consolidation journal entries to account for Cricket Ltd’s investment in Charlie Ltd for the year ended 30 June 2017 in accordance with AASB 128, assuming that Cricket Ltd does prepare consolidated financial statements. Show all workings.
Marks allocated
Acquisition analysis 3
Journal entries 5
Workings 2
Total 10
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